I'm the Director of Sportsimpacts and an Economics Professor at the George Herbert Walker School of Business at Webster University in St Louis, MO.
I've conducted research at Super Bowls, Final Fours, All-Star Games, Ryder Cups, and numerous Division I NCAA Championship events.
www.sportsimpacts.net
www.webster.edu/business/depts/

And in an effort to get something for players before becoming free agents, WR Percy Harvin was traded from Minnesota to Seattle while WR Anquan Boldin was traded from Super Bowl winning Baltimore to Super Bowl runner-up San Francisco.

The NFL’s free agency frenzy is but a contributing factor behind while this sport is North America’s most popular, as well as among the most profitable leagues in the world with annual revenues approaching $10 billion. Buzz surrounding free agency gets fans jazzed about the upcoming season a good 3-4 months before training camps are set to open.

That’s savvy PR, and it is a reminder of how the underlying economic structure of a league can significantly impact the league’s popularity and competitive balance.

THE NFL’S HARD SALARY CAP

Prior to the NFL’s free agent signing period which began on March 12th for the 2013 season, it was announced that the 2013 NFL hard salary cap would be $123 million…up from the $120.6 million in 2012. Some teams will enjoy carryover allowances which will further enable them to be active during free agency, while the Redskins and Cowboys must face cap penalties.

But the beauty of the NFL’s hard salary cap, combined with the massive amount of revenue sharing that takes place league-wide (national media revenue is split equally, as is 35-40% of all ticket revenues), is that market size ceases to matter in terms of having a significant influence upon game outcomes and league standings. It’s about managerial acumen off-the-field (e.g. talent assessment, cap management, drafting prowess) and coaching/athlete proficiency on Sundays (e.g. in-game management and adjustments, execution of tasks, schemes), rather than which ownership can write the largest checks.

As evidence, note that two of the league’s most wealthy owners (Daniel Snyder of the Redskins and Jerry Jones of the Cowboys) have amassed little post-season success in the last 15 years. Conversely, small-market teams in Pittsburgh, Green Bay, and Indianapolis have sustained on-field excellence.

As evidence, note that mid-market Seattle and economically devastated Detroit have been extremely active/productive during this year’s free agent signing period.

In short, the NFL’s hard salary cap makes it very difficult for a team to hoard talent and indefinitely maintain a stronghold among the league’s elite. Rather, it challenges teams to make short-run and long-run resource allocation decisions in the face of a binding fiscal constraint. This, coupled with extraordinary revenue sharing and a element of randomness that impacts both player, coaching, and team performance, makes for greater competitive balance.

Greater competitive balance leads to greater uncertainty in game outcomes and league standings. And for my money, it is this palpable uncertainty that drives the gargantuan demand for professional football.

UNCERTAINTY OF OUTCOME HYPOTHESIS

Unlike traditional product markets, in which a monopoly is generally a desirable position for a firm to hold, in sports a monopolist of on-field success can be a detriment to the financial well being of the league and ultimately of the monopolist itself. Because without a degree of competition between the teams playing in a particular game or among teams vying for top honors in league standings (i.e. without a degree of uncertainty as to the outcome of games, league standings, etc…), the demand for the overall product could suffer. In sum, the Uncertainty of Outcome Hypothesis (UOH) suggests that leagues are better off in terms of driving consumer demand for the product if there is greater uncertainty.

Furthermore, because individual teams desire to monopolize their potential share of wins, the UOH provides a justification for leagues to limit the possibility of monopolization through the use of revenue sharing, enforced cost containment through salary caps, and limiting the degree of labor mobility.

In short, it seems quite clear to me that the combination of hard salary caps and extensive revenue sharing enhance the competitive balance of the National Football League. As a by-product, this raises consumer demand for the product by increasing the uncertainty associated with each season’s outcomes.

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The NFL is widely popular for a variety of reasons: a scarcity of games relative to other sports, the ease of which to participate in fantasy football or gambling activities, and off-season events like free agency and the draft keep the sport on the consumer’s mind over the entire calendar year.

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